Tag: Nordstrom

Recently a roughly $8.4 billion offer from the Nordstrom family to take the namesake retailer private was rejected as inadequate. The deal now seems at risk as the special committee in charge of evaluating a potential transaction indicated that the price needed to be “substantially” and “promptly” improved upon or they would terminate further discussions.

While there is one major concern that looms large in any such deal, my hope is that the Nordstroms can get this done. While as a brand Nordstrom faces most of the same challenges that confront just about all retailers in this era of digital disruption, allowing the company to operate without the harsh and impatient glare of Wall Street could be a major long-term win. Here are a few key benefits to going private:

Avoiding the obsession with growth. The fact is that Nordstrom is fast becoming a relatively mature business. It has few new store openings to execute within its core concepts, it is very well penetrated in e-commerce, and there are not a ton of readily accessible wholly new categories (or geographies) to expand into. The Street’s obsession with growth for growth’s sake often pushes maturing brands to expand their core business too far (think Gap and J. Crew’s fashion missteps, Michael Kors’ distribution overexpansion, or Coach’s — and many others’ — over reliance on the outlet channel).

Freedom to invest in physical retail. Despite the retail apocalypse narrative, physical retail is not dead; boring retail is. Fortunately Nordstrom has crafted a compelling digital presence, a well executed store model and a harmonious experience across channels. For the most part, Nordstrom full-line and Rack stores are in excellent real estate and it’s unlikely that they will have many store closings on the horizon despite the carnage around them. Nordstrom understands well that physical retail drives e-commerce and vice versa. The challenge is to continue evolving to address changing consumer demands, the emerging importance of younger shoppers and the convergence of digital and physical channels. To thrive Nordstrom must have both a remarkable digital experience and a remarkable brick & mortar experience. Despite what some in the investment community think, for some retailers additional investment in physical retail is not only necessary to keep pace, it is essential to maintain competitive advantage. Nordstrom is firmly in this category.

Ability to think long term and take prudent risks. While some investors are willing to take big bets on silly moon shots (but enough about Wayfair), those that invest in “traditional” retail tend to be more short-term focused and risk averse. Yet we live in a world where the future is getting harder and harder to predict and what will ultimately pay off may take years to become clear. Few retailers will survive, much less thrive, without leaning into more risk and establishing a strong test and learn culture. Historically Nordstrom has shown a willingness to be more innovative than most of its peers, including testing new formats (such as Nordstrom Local), buying emerging concepts (Haute Look and Trunk Club), as well as acquiring two technology companies just last week. While Nordstrom is largely past the capital intensive nature of their major investments in omni-channel infrastructure and expansion into Canada and New York City, there is every reason to believe that the future will require considerable investment and a greater tolerance for risk in order to stay truly remarkable.

Quite a few retailers have gotten into trouble by taking on too much debt through a private equity buyout. Unlike Toys R Us and others, which were struggling with the fundamentals of their core value proposition when they took on considerable leverage, the Nordstrom business model is fundamentally sound, the real estate portfolio is solid, and the management team is excellent and deeply experienced. Nevertheless, financial flexibility, as well as strategic and operating agility, will be key to navigating retail’s future. As mentioned above, Nordstrom is fortunate to have already done much of the heavy lifting where plenty of others are struggling to catch up. Yet, layering on substantial debt and interest payments may limit the company’s ability to make acquisitions and/or the technology investments to stay on the leading edge.

Fortunately the debt levels that are currently being contemplated don’t put the Nordstrom deal into the territory that ToysRUs and Neiman’s now find themselves. But obviously if the buyout price increases substantially it is likely the debt burden will as well. Investors also need to mindful of how well any company with considerable leverage would fare in a major economic downturn.

As most U.S. department stores reported earnings recently, a certain level of ebullience took hold. Macy’s, Kohl’s and even Dillard’s, for crying out loud, beat Wall Street expectations, sending their respective shares higher. J.C. Penney, which has failed to gain any real traction despite Sears’ flagging fortunes, continued to disappoint, suggesting that I probably need to revisit my somewhat hopeful perspective from last year. And in the otherworldliness that is the stock market, Nordstrom — the only department store with a truly distinctive value proposition and objectively good results — traded down on its failure to live up to expectations.

Given how beaten down the moderate department store sector has been, a strong quarter or two might seem like cause for celebration–or at least guarded optimism. I beg to differ.

First, we need to remember that the improved performance comes mostly against a backdrop of easy comparisons, an unusually strong holiday season and tight inventory management. There is also likely some material (largely one-time) benefit from the significant number of competitive store closings and aggressive cost reduction programs that most have put in place.

Second, and more importantly, we cannot escape the fact that mid-priced department stores in the U.S. (and frankly, much of the developed world) all continue to suffer from an epidemic of boring. Boring assortments. Boring presentation. Boring real estate. Boring marketing. Boring customer service. And on and on. For the most part, they are all swimming in a sea of sameness at a time when the market continues to bifurcate and it’s increasingly clear that, for many players, it’s death in the middle. It’s nice that some are doing a bit better, but as I pointed out last summer, we should not confuse better with good.

To actually be good — and to offer investors a chance for sustained equity appreciation — a lot more has to happen. And while being less bad may be necessary, it is far from sufficient. Most critically, all of the major players still need to amplify their points of differentiation on virtually all elements of the shopping experience. It’s comparatively simple to close cash-draining stores, root out cost inefficiencies and tweak assortments. It’s another thing entirely to address the fundamental reasons that department stores have been ceding market share to the off-price, value-oriented, fast-fashion and more focused specialty players for more than a decade. And now with apparel and home goods increasingly in Amazon’s growth crosshairs, there has never been a more urgent need to not only to embrace radical improvement, but to really step on the gas.

Without a complete re-imagination of the department store sector — and frankly who even knows what that could actually look like — near-term improvements only pause the segment’s long-term secular decline.

It’s unclear how much the eventual demise of Sears and the inevitable closing of additional locations on the part of other players will benefit those still left standing. It’s unclear whether the current up-cycle in consumer spending will be maintained for more than another quarter or two. What is crystal clear, however, is that incremental improvement in margin and comparable sales growth rates merely a point or two above inflation never makes any of these mid-priced department stores objectively good.

Ultimately, without radical change, it all comes down to clawing back a bit of market share and squeezing out a bit more efficiency in what continues to be a slowly sinking sector riddled with mediocrity. Boring, but true.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

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There is some dispute over whether more stores opened during 2017 than were closed. IHL says yes. Fung Retail Tech says no. Mostly I say “who cares”?

Either way, it’s clear that the retail landscape is changing rapidly, causing some retailers to prune their store counts, shutter locations en masse or liquidate entirely. What’s unfortunate–and not the least bit useful–is the tendency to declare that physical retail is dying and that we are going through some sort of “retail apocalypse.” The facts clearly do not support this notion. Similarly devoid of substance and nuance is the proclamation that e-commerce is eating the world and that virtually all “traditional” retailers are falling victim to the “Amazon Effect.”

What IS occurring at the macro-level is three-fold. First, the irrational expansion of retail space during the past two decades is finally correcting itself. Second, as retailers better understand the physical requirements to support a world where online is a significant and growing sales channel, many are optimizing their footprints to better align space with demand. Third, and far more important, is that retail brands that failed to innovate and create a meaningfully relevant and remarkable value proposition are rapidly going the way of the horse-drawn carriage.

A look at either the IHL or the FRT data reveals precisely the same picture. Lots of physical stores are being opened on the part of brands that have a winning formula, both in the value sector (think TJX, Aldi, Costco, Dollar General) and at the other end of the spectrum (think Nordstrom, Sephora, Ulta). Overwhelmingly, the retailers that are closing large number of stores are those that have operated in the vast undifferentiated middle. And it’s becoming increasingly clear that it’s death in the middle.

Physical retail is not dead. Boring retail is.

I believe the majority of over-capacity from excessive building has now been dealt with (or will be as retailers do typical post-holiday store closings). I believe most sophisticated retailers have a clear understanding of the go-forward physical requirements to best support a harmonized (what some prefer to call “omni-channel”) strategy. They get the critical role that physical stores play in supporting the online business and vice versa. This implies that retailers that have fundamentally sound value propositions won’t be closing very many stores this year. And the best positioned brands will defy the bogus retail apocalypse narrative and continue opening stores–in some cases large numbers of them.

The flip side is that retailers with unremarkable concepts will continue their march toward oblivion. Some will hang around longer than they should–I’m looking at you Sears–because they have assets to sell off to raise cash, all the while delaying the inevitable. Store closings are a panacea, not a fix.

Similarly, many pure-play online brands with unsustainable economics will either figure out a viable bricks & clicks strategy (e.g. Warby Parker), get acquired by the digitally-native brand bail out fund known as Walmart or go ‘buh ‘bye having burned through both their cash and all the greater fools.

For me, last year was a large scale, inevitable pruning away of the brush. Now in 2018, with the obvious losers having been closed in 2017, we get to see far more clearly the brands that truly have longevity, be they omni-channel” or pure-plays.

Now we get to witness the real reckoning.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

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Late last week the Neiman Marcus Group named former Ralph Lauren executive Geoffroy van Raemdonck as their new CEO, replacing company veteran Karen Katz (full disclosure: once my boss). While not terribly surprising given the company’s struggles under a mountain of debt, extremely rocky “NMG One” systems implementation and largely stagnant growth, the move does come at a critical time for North America’s leading luxury retailer.

As van Raemdonck takes the helm next month (and Katz moves to a Board position), he will be faced with addressing several important and vexing challenges. As I was SVP of strategy, business development & multi-channel marketing for the Neiman Marcus Group from 2004-08 (most of that time reporting to then CEO Burt Tansky) I have a somewhat unique perspective on what requires intense and urgent focus. Here’s my take:

Growing share in a mature and shifting market

As I wrote nearly a year ago, much of luxury retail has hit a wall. Many brands, including Neiman Marcus and its most direct competitor Saks Fifth Avenue, have struggled to grow both top and bottom line as core customers “age out” of peak spending years and very few new store locations exist. Neiman’s also has one of the highest e-commerce’s penetration in the industry and much of that growth is now merely channel shift.

Competition is also intensifying. In addition to the myriad online competitors, many of Neiman’s key vendors wisely continue to invest in direct-to-consumer growth strategies as they recognize the advantages of forging a direct relationship with consumers, the strategic brand control that operating their own stores and website affords and the opportunity for greater margins. Some are even pulling back from wholesale selling to create more exclusivity and more tightly managed distribution.

Affluent consumer behavior is also evolving markedly. After the financial crisis fewer customers seem willing to spend as conspicuously as before– despite a booming stock market and growing wealth inequality. Moreover, younger customers are starting to represent a growing percentage of the potential target market and clearly they are more digitally savvy, less logo conscious and don’t (yet?) seem to value the core elements of the luxury department store experience. All these factors create strong headwinds for Neiman Marcus’ hopes to restore significant revenue growth.

An overplayed hand

The work my customer insight team did on customer segment performance in 2007-08 revealed several alarming trends. While we were doing well with the uber-wealthy who tended to pay full price and were largely impervious to our raising average unit prices 7-9% per year, the rest of our business was weakening considerably and steadily. For customers who represented more than 2/3 of our profits, we were experiencing decreasing customer counts and lower transaction levels every year. In fact, literally all of our comparable store growth in the prior 5 years could be explained by the growth in average unit retail. While this was tolerated (and maybe even appreciated) by our very best customers, we were leaking business to Nordstrom (and others) as many very good customers found our ever increasing prices to be too high and our customer experience frequently lacking.

The strategy that had gotten Neiman’s to a leadership position was starting to run out of gas. Until the financial crisis hit (and Burt Tansky retired) little of substance was done to address this growing issue. While Karen Katz has made some inroads during her tenure, the brand still suffers from too narrow a customer base and little demonstrated ability to grow customer and transaction counts. This is the single biggest strategic challenge facing the company over the long term.

Unsustainable debt load

Neiman’s private equity owners paid way too much and saddled the company with a debt level that, unaddressed, will bring the company to its knees. There is simply no way for the brand to earn its way out of the problem. It is merely a matter of time before a significant restructuring of some sort must take place. The sooner this gets resolved the better, but thus far, despite the obviousness of the issue, neither the equity or debt holders have been willing to take the necessary haircut. Hope is not a strategy.

Limited degrees of freedom and flexibility

While Neiman’s has seen their operating performance improve somewhat, macro-economic factors explain much of it and there can be no certainly of that continuing. The fact is that the only way Neiman’s performance improves markedly is for them to start gaining significant share in a mostly flat market. That will almost certainly require substantial investment in new technology, re-inventing the customer experience at retail and extending their digital capabilities. Saddled with large debt and interest payments, the company will be severely constrained in having the cash to do what it will take.

Attracting younger customers and executing the ‘customer trapeze’

While demographically oriented strategies are typically overly simplistic, demographics ARE destiny over the long-term. For Neiman Marcus to thrive in the future they must navigate what I like to call the ‘customer trapeze.’ They must deftly do their best to optimize value from their historical high spending core customers–who tend to be older, love the traditional in-store shopping experience and prefer the highest end brands– while simultaneously doing a much better job of attracting new customers who are largely “digital first” shoppers, prefer more relaxed and democratic personal service and tend to spend considerably less on average. Getting this portfolio right isn’t easy and will require Neiman’s to literally take significant share away from some very formidable competitors whose brands’ are currently better aligned with younger, more aspirational shoppers’ needs and values.

An inevitable merger with Saks?

Many people believe that both Neiman’s and Sak’s fundamentally have too many stores. They are wrong. Because of incredibly favorable rent deals and developer capital contributions, the break-even volumes for most stores are very reasonable. Even if their physical stores were to lose 10% of their volume you could count the number of stores that would be cash negative on one hand. More importantly, stores are critical to helping support the online business, which is nearly a third of Neiman Marcus’ total volume. We understood this relationship well when I worked there–and this dynamic has only gotten far stronger. Closing stores, for the most part, would weaken the brand, not help it.

Having said that, a long rumored merger with Saks holds the potential for value creation. There are some geographies where having Saks and Neiman Marcus duke it out directly only leads to mediocre profits for both, particularly as more business moves online. Rationalizing locations would increase the overall profit pool. Opportunities for eliminating redundant overhead are hardly trivial. Alas, the challenges of both companies’ current capital structures make this conceptually valid merger more complex than it might otherwise be.

Cultural pushback

When I joined the Neiman Marcus executive team one of the first things I noticed was how strong the culture was. This was good and bad. The good part was that most folks had worked together for a long time and the company was a well oiled execution machine. The bad parts were exactly the same thing. Strategy played second fiddle to execution, many senior managers lacked the requisite external perspective and, consequently, there were many blindspots.

Innovation as a discipline was also incredibly under-valued. Karen Katz deserves praise for moving the company forward on many of these fronts, but some of what is needed to take the company to the next level is not inherent to its DNA. van Raemdonck is the first outsider to run the company in some time. I expect a rocky road generally, as well as some departures of high level, long-tenured executives.

Unlike many decades old brands that are struggling mightily, Neiman has many strong core elements. And that’s clearly an advantage as van Raemdonck sets his agenda. Unfortunately, Neiman’s historical strengths are also at the center of many of its go-forward challenges. Until the debt issue is resolved, even under a best case scenario, their new leader will likely be hamstrung to move as quickly as he would like, not to mention at the pace that the company desperately needs.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

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By all accounts this holiday shopping season looks to be pretty solid overall–perhaps the best since 2010. Aggregate sales will likely be up between 3.5% and 4.0%. E-commerce year-over-year growth will come in around 17%. Retailers’ inventories seem to be generally in good shape, which should allow most to deliver strong gross margin performance. And despite the silly retail apocalypse narrative, I’ll even venture to say that sales in physical stores will show a slight increase.

While we can be certain that the coming weeks will be filled with stories dissecting this season’s winners and losers, the truth is we already know the outcome. The retailers that consistently offer a relevant and remarkable value proposition–and execute well against it–are growing, making good money and (hold on to your hat) opening stores–sometimes a lot of them. We see this across a spectrum of price points. Off-price retail, warehouse clubs and dollar stores doing well; great, typically higher-end, specialty stores gaining share and delivering solid profits.

The simplistic notion that physical retail is going away is clearly flat out wrong. The continuing rise of Amazon does not spell doom for all of retail. The rapid growth of e-commerce hardly represents the death knell for traditional brick & mortar stores. For every Sears, Radio Shack and Borders, there is a Best Buy, Walmart or Nordstrom. The failed (and failing) retailers are the ones that did not innovate, that thought the physical store and e-commerce were the channels, when the customer was the channel all along. Somehow they believed they could cost cut their way to prosperity instead of evolving to where the customer was moving. Lower costs and drastic pruning of store locations mean precisely nothing if when the dust settles you are still drowning in a sea of sameness.

Physical retail is not dying. Boring retail is.

The fault is not with stores, it’s with stores that are irrelevant and unremarkable.

The fault in our stores lies in seeking to be everywhere and ending up being nowhere. The fault in our stores lies in aiming to be everything to everybody and being mostly “meh” to just about everyone. The fault in our stores emanates from retailers failing to understand the customer journey and committing to ruthlessly rooting out friction points and amplifying the experiences that really matter along that journey. The fault in our stores rests in retailers unwillingness to experiment and take prudent risks.

The shift of power to the consumer is not going away. What was once scarce rarely is anymore. Most customer journeys will start in a digital channel. Seamless integration across channels is now table-stakes. Good enough no longer is. Today’s basis for competition is being redefined, often radically.

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Since the Whole Foods deal, more than a few industry analysts and pundits have weighed in on which retailers might be on Amazon’s shopping list.

Various theories underpin the speculation. Some say Jeff Bezos wants to go deeper in certain categories, so Lululemon or Warby Parker get mentioned. Foursquare (is that still a thing?) crafted its own list from analyzing location data. The Forbes Tech Council came up with 15 possibilities. The always provocative, and generally spot-on, Scott Galloway of L2 and NYU’s Stern School of Business believes Nordstrom is the most logical choice.

Obviously no one has a crystal ball, and Amazon’s immediate next move could be more opportunistic than strategic. Given Amazon’s varied interests, there are several directions in which they could go. And clearly they have the resources to do multiple transactions, be they technology enabling, building their supply-chain capabilities out further, entering new product or service categories, or something else entirely. For my purposes, however, I’d like to focus on what makes the most sense to expand and strengthen the core of their retail operations.

Before sorting through who’s likely to be right and who’s got it wrong (spoiler alert: Scott), let’s briefly think about the motivating factors for such an acquisition. From where I sit, several things are critical:

Materiality. Amazon is a huge, rapidly growing company. To make a difference, they have to buy a company that either is already substantial or greatly accelerates their ability to penetrate large categories. This is precisely where Whole Foods fit in.

Fundamentally Experiential. There is an important distinction between buying and shopping. As my friend Seth reminds us, shopping is an experience, distinct from buying, which is task-oriented and largely centered on price, speed and convenience. Amazon already dominates buying. Shopping? Not so much.

Bricks And Clicks. It’s hard to imagine Amazon not ultimately dominating any category where a large percentage of actual purchasing occurs online. Where they need help is when the physical experience is essential to share of wallet among the most valuable customer segments. They’ve already made their bet in one such category (groceries). Fashion, home furnishings and home improvement are three obvious major segments where they are under-developed and where a major stake in physical locations would be enormously beneficial to gaining significant market share.

Strong Marginal Economics. We know that Amazon barely makes money in retail. What’s not as well appreciated is the inconvenient truth that much of the rest of e-commerce is unprofitable. Some of this has to do with venture-capital-funded pure-plays that have demonstrated a great ability to set cash on fire. But unsustainable customer acquisition costs and high rates of product returns make many aspects of online selling profit-proof. An acquisition that allows Amazon access to high-value customers it would otherwise be challenged to steal away from the competition and one that would mitigate what is rumored to be an already vexing issue with product returns could be powerfully accretive to earnings over the long term. Most notably this points to apparel, but home furnishings also scores well here.

So pulling this all together, here’s my list of probable 2018 acquisition targets, the basic rationale and a brief word on why some seemingly logical candidates probably won’t happen.

Not Nordstrom, Saks or Neiman Marcus

Scott Galloway is right that Nordstrom (and to a lesser degree Saks and Neiman Marcus) has precisely the characteristics that fit with Amazon’s aspirations and in many ways mirror the rationale behind the Whole Foods acquisition. Yet unlike Whole Foods, a huge barrier to overcome is vendor support. Having been an executive at Neiman Marcus, I understand the critical contribution to a luxury retailer’s enterprise value derived from the distribution of iconic fashion brands, as well as the obsessive (but entirely logical) control these same brands exert over distribution. Many of the brands that are key differentiators for luxury department stores have been laggards in digital presence, as well as actually selling online. Most tightly manage their distribution among specific Nordstrom, Saks and Neiman Marcus locations. If Nordstrom or the others were to be acquired by Amazon, I firmly believe many top vendors would bolt, choosing to further leverage their own expanding direct-to-consumer capabilities and doubling down with a competing retail partner, fundamentally sinking the value of the acquisition. While Amazon might try to assure these brands that they would not be distributed on Amazon, I think the fear, rational or otherwise, would be too great.

Macy’s, Kohl’s or J.C. Penney

Amazon has its sights set on expanding apparel, accessories and home but is facing some headwinds owing to a relative paucity of national fashion brands, likely lower-than-average profitability (mostly due to high returns) and a lack of a physical store presence. Acquiring one of these chains would bring billions of dollars in immediate incremental revenues, improved marginal economics and a national footprint of physical stores to leverage for all sorts of purposes. All are (arguably) available at fire-sale prices. Strategically, Macy’s makes the most sense to me, both because of their more upscale and fashion-forward product assortment (which includes Bloomingdale’s) and because of their comparatively strong home business. But J.C. Penney would be a steal given their market cap of just over $1 billion, compared with Macy’s and Kohl’s, which are both north of $8 billion at present.

Lowe’s

The vast majority of the home improvement category is impossible to penetrate from a pure online presence. Lowe’s offers a strong value proposition, dramatic incremental revenues, already strong omni-channel capabilities, and a vast national network of stores. The only potential issue is its valuation, which at some $70 billion is hardly cheap, but is dramatically less than Home Depot’s.

A Furniture Play

Home furnishings is a huge category where physical store presence is essential to gaining market share and mitigating the high cost of returns. But it is also highly fragmented, so the play here is less clear as no existing player provides a broad growth platform. Wayfair, the online leader, brings solid incremental revenue and would likely benefit from Amazon’s supply chain strengths. But without a strong physical presence their growth is limited. Crate & Barrel, Ethan & Allen, Restoration Hardware, Williams-Sonoma and a host of others are all sizable businesses, but each has a relatively narrow point of view. My guess is Amazon will do something here — potentially even multiple deals — but a big move in furniture will likely not be their first priority in 2018.

As I reflect on this list (as well as a host of other possibilities), I am struck by three things.

First, despite all the hype about e-commerce eating the world, the fact remains that some 90% of all retail is done in physical stores, and that is because of the intrinsic value of certain aspects of the shopping experience. For Amazon to sustain its high rate of growth, a far greater physical presence is not a nice “to do” but a “have to do.”

Second, the battle between Amazon and Walmart is heating up. While they approach the blurring of the lines between physical and digital from different places, some of their needs are similar, which could well lead to some overlapping acquisition targets. That should prove interesting.

Lastly, the business of making predictions is inherently risky, particularly in such a public forum. So at the risk of stating the obvious, I might well be wrong. It wouldn’t be the first time, and it surely won’t be the last.

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It’s been a long, slow slide for department stores. Starting some two decades ago, the major chains began leaking share to the big-box, off-the-mall players. Just as that started to stabilize somewhat, Amazon and other e-commerce pure-plays began chipping away at the sector’s once dominant position in apparel, accessories and home products. Most recently, in addition to the ongoing threat from online shopping, off-price chains have benefitted from a growing legacy of major chain mediocrity.

Unsurprisingly, investors have treated the sector like the plague. The market values of Macy’s, J.C. Penney, Sears, Dillard’s and Kohl’s have all plummeted. Even Nordstrom, which has performed relatively well, has seen its market value halved in the past couple of years. Just this past week J.C. Penney saw its shares, which were already off some 80% since 2013, plunge further after a surprise earnings warning. In addition, Sycamore looks to be picking at the carcass of Bon-Ton Stores and Lord & Taylor is selling its iconic Manhattan flagship to WeWork. And on and on.

For many, this unrelenting parade of bad news leads them to believe that department stores are toast. But just as the retail apocalypse narrative is nonsense, so is the notion that department stores are going away. I am willing to go out on a limb to say that a decade from now there will still be hundreds of large, multi-category brick-and-mortar stores operating in the United States and throughout the world. But despite this conviction, things are virtually certain to get worse before they get better and three major things must happen before any sort of equilibrium can be reached and decent profits can return.

Major space rationalization/consolidation. The overall retail industry is still reeling from decades of overbuilding, as well as the abject failure of most department store anchors to innovate to stay remotely relevant and remarkable. While the idea that major chains can shrink to prosperity is fundamentally misguided, it’s clear that a) most chains still have too many stores, b) the stores they have are, on average, larger than they need and c) there is no compelling reason for Sears, Kmart, Bon-Ton (and perhaps a few others) to exist at all. Many dozens, if not hundreds, of locations are certain to be whacked after the holiday season. And despite the liquidation sales that will put pressure on earnings in the first half of the calendar year, there is actually a real chance for year-over-year margin improvement by the time the holiday season rolls around this time next year.

A true commitment to be more focused, more innovative and more remarkable. It turns out department stores, like every other struggling retail brand, picked a really bad time to be so boring. It turns out that deferred innovation is even more crippling than deferred maintenance. It turns out that trying to be everything to just about everybody means being mostly irrelevant to a lot of folks. Given the certain continuing contraction of the sector, the only hope for remaining brands is to gain significant amounts of market share. And that only happens to any material degree by embracing intense customer-centricity to become more relevant to a tighter customer set and by consistently executing a far more remarkable experience than the competition. Continued flogging of me-too products, one-size fits all advertising, boring presentation and chasing the promiscuous shopper through promotion on top of promotion won’t cut it. Period. Full stop. The hard part is that most of the flailing brands are woefully far behind, lack a culture of innovation and simply don’t have the cash to do what it will take to right the ship.

Amazon needs to place its bet. It’s clear that Amazon has its sights set on being a much bigger player in apparel, accessories and home products. And it’s hard to see how Amazon gets speed, adds the necessary volume and addresses the vexing returns/supply chain issues without a major physical presence in the moderate and higher-end softlines arena. For that reason, I’m also willing to go out on a limb and predict that Amazon will buy a major department store player in 2018. And just as its acquisition of Whole Foods is transformative for the grocery industry, so too will be a much deeper brick-and-mortar (and omnichannel) presence in the department store sector. In fact, it’s hard to underestimate how a big move by Amazon here will reshape just about every imaginable facet.

While 2017 has brought more than its fair share of department store news–and we’re hardly finished–I see 2018 as being chock-a-block with not only profound news but likely representing the year when the future of the sector will become far more clear. Stay tuned.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

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Last week Nordstrom announced it will open its first “Nordstrom Local” in West Hollywood, California. The new venture is noteworthy on several dimensions. First, at 3,000 square feet, the pilot concept is dramatically smaller than a typical Nordstrom full-line department store. Second, it won’t stock any of the items that Nordy’s is best known for, such as shoes, clothing, cosmetics and accessories. Third, the focus will be on services: tailoring, manicures, style advice and cocktails.

Nordstrom joins a growing number of brands shrinking their footprints and once online only brands delving into the physical realm with small box stores. Of course, the reasons for the big guys going small and the little online brands getting into brick and mortar vary. The downsizing of traditional formats is often driven by a typically vain attempt to optimize productivity. With more business being done online the thought is that less square footage is needed to take care of the customer. The problem is that shrinking to prosperity rarely works.

Another big driver of smaller formats being promulgated by major retailers is the desire to get closer to the customer. Smaller versions of traditional format stores like Target’s urban concept allow the company to open many new more convenient locations at acceptable economics.

Most interesting–and probably the leading indicator of what’s to come–are the new brick-and-mortar “micro-concepts” that are designed from a customer point of view and rooted in the understanding of the interplay of online and offline. In announcing the Nordstrom Local test Nordstrom’s co-president Eric Nordstrom says it best: “There aren’t store customers or online customers—there are just customers who are more empowered than ever to shop on their terms.” What Nordstrom has understood for a long time–and what helps explain much of their success during the past decade–is that physical stores drive online and online drives stores. Ultimately, the retail brands that win create a highly remarkable and relevant experience that meets the customer where they are.

Digitally native brands that move into physical retail apply this thinking as well. While brands such as Bonobos, Warby Parker and many others initially believed they could build successful enterprises without pesky brick-and-mortar locations, they’ve come to realize that not only do many customers prefer to shop in actual stores, but also that physical locations bring many important economic advantages. The beauty of these brands starting with a blank sheet of paper when it comes to designing stores is that they can pick the best locations and create a highly experiential and remarkable shopping experience that leverages the best of online and offline into a more relevant and harmonious whole.

Clearly, the jury is still out on most of what’s in market today. Whether the movement of pure-play brands into physical retail will pan out remains to be seen as virtually all of these brands are hemorrhaging cash and reports of high sales productivity out of a few choice locations do not necessarily indicate profitable scalability. Nascent micro-concepts like Bodega are far from proven winners. And with Nordstrom Local it will clearly take some time to know whether it turns out to be a noble experiment or something that can be rolled out to a substantial number of locations.

While we are early in the move to micro-concepts I expect to see three things happen over the next year or two. First, is a dramatic uptick in new concept testing from both start-ups and traditional players. Small enables greater customer reach. Small makes more interesting site locations possible. Small lowers breakeven sales volumes. Small blends the best of online and offline. Second, will be the dramatic expansion of a few powerful formats where dozens, if not hundreds, of locations can be opened. Lastly, we are also likely to see some big flame-outs, particularly among the online only players that never had a viable business model in the first place.

Regardless of how this all ultimately plays out, from where I sit, Nordstrom is to be applauded for their willingness to take risks and to experiment. Many more retailers would be wise to follow their example.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

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While the “retail apocalypse” narrative is nonsense, it’s clear that we are witnessing a major contraction in traditional retail space. Store closings have tripled year over year and more surely loom on the horizon. The “death of the mall” narrative also tilts to the hyperbolic, but in many ways it is the end of the mall as we know it, as dozens close and even larger number are getting re-invented in ways big and small.

While the shrinking of store fleets gets a lot of attention, another dynamic is becoming important. Increasingly, major retailers are down-sizing the average size of their prototypical store. In some cases, this is a solid growth strategy. Traditional format economics often don’t allow for situating new locations in areas with very high rents or other challenging real estate circumstances. Target’s urban strategy is one good example. In other situations, smaller formats allow for a more targeted offering, as with Sephora’s new studio concept.

By far, however, the big driver is the impact of e-commerce. With many retailers seeing online sales growing beyond 10% of their overall revenues–and in cases like Nordstrom and Neiman Marcus north of 25%–brick & mortar productivity is declining. It therefore seems logical that retailers can safely shrink their store size to improve their overall economics.

Yet the notion that shrinking store size is an automatic gateway to better performance is just as misunderstood and fraught with danger as the idea that retailers can achieve prosperity through taking an axe to the size of their physical store fleets. To be sure, there are quite a few categories where physical stores are relatively unimportant to either the consumer’s purchase decision and/or the underlying ability to make a profit. Books, music, games and certain commodity lines of businesses are great examples. But brick & mortar stores are incredibly important to the customer journey for many other categories, whether the actual purchase is ultimately consummated in a physical location or online.

Often the ability to touch & feel the product, talk to a sales person or have immediate gratification are critical. In other cases, lower customer acquisition and supply chain costs make physical stores an essential piece of the overall economic equation. Shrinking the store base or the size of a given store can have material adverse effects on total market share and profit margins. For this reason, retailers are going to need (and Wall St. must understand) a set of new metrics.

The worst case scenario is that a brand makes itself increasingly irrelevant by having neither reasonable market coverage with its physical store count nor a compelling experience in each and every store it operates. Managing for sheer productivity while placing relevance and remarkability on the back burner is all too often the start of a downward spiral. Failing to understand that a compelling store presence helps a retailer’s online business (and vice versa) can lead to reducing both the number of stores and the size of stores beyond a minimally viable level. But enough about Sears.

In the immediate term, we may feel good that by shooting under-performing locations and shrinking store sizes through the pruning of “unproductive” merchandise we are able to drive margin rates higher. Alas, increasing averages does nothing if we are losing ground over the long-term with the customers that matter.

A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

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The retail industry has used “same-store sales” (or “comparable store sales”) as a key indicator of a retailer’s health for decades. From where I sit, its usefulness is rapidly fading, if not bordering on irrelevance.

While it remains to be seen whether retail traffic declines will last forever, most traditional retailers will struggle to grow physical store sales in the face of the significant and inexorable shift to online shopping. With few exceptions, so-called “omnichannel” retailers are experiencing flat to slightly down brick-and-mortar revenues while their e-commerce business continues to grow 10-20%. The mostly moribund department store sector points to this new reality. While overall revenues are basically going nowhere, online sales now account for over 30% of total revenue at Neiman Marcus, over 20% at Nordstrom and Saks, and some 18% at Macy’s (according to eMarketer), with the percentage growing every quarter.

What we do know, and what’s important to grasp and appreciate, is that physical stores are critical drivers of e-commerce success–and vice versa. For most retailers, a brick-and-mortar location sits at the heart of a brand’s ecosystem for a given trade area. Any retailer with a decent level of channel integration employs stores to acquire new customers, to serve, buy online, pickup in store orders (and returns) and to convert shoppers that start their shopping online but need to touch, feel or try on a product before buying. The decision of “digitally native” brands like Amazon, Bonobos, Warby Parker and others to open stores underscores this fact. Conversely, legacy retailers must be careful to avoid closing too many stores or they risk damaging the overall brand, slowing e-commerce growth and accelerating a downward spiral.

Customers shop brands, not channels or touchpoints. A robust one brand, many channels strategy requires management teams to understand precisely how the various marketing, experience and transactional channels interact to make a more relevant and remarkable whole. With this understanding, same-store sales performance may still have some utility, but “same trade area” performance–which accounts for all sales regardless of purchase channel within the influence area of a store–becomes a far more interesting and useful metric. Critically, it also provides the basis for understanding the drivers of customer segment level performance at a more granular and actionable level.

Rapidly declining same-store sales performance may suggest the need for aggressive action, including shuttering stores. Unquestionably, the great de-leveraging of retail store economics is cause for real concern. But without a broader view of how digital commerce and the in-store shopping experience work together, an obsession with same-store sales performance will inevitably lead to some very dumb decisions indeed.

A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts here.